A few weeks ago I read The Exponential Age Will Transform Economics Forever, an article in Wired by Azeem Azhar based on his recently published book The Exponential Age. Azhar’s central thesis is that the chasm between what technology allows us to do and what our institutions are prepared to handle has been rapidly widening. New technologies are being invented and scaled at an ever-faster pace. But our institutions, - including our economic systems, political organizations and social norms, - are changing much more slowly. While technological advances follow an exponential curve, institutional adaptation follow a straight, incremental line.
The gap between technological and institutional change is nothing new. Ever since the advent of the Industrial Revolution, there’s been a significant time lag between the emergence of a transformative technology and its ensuing impact on economies and societies. Even after reaching a tipping point of market acceptance, it takes considerable time, - often decades, - for their benefits to be fully realized.
In The Productivity J-Curve, a 2018 NBER paper, Erik Brynjolfsson, Daniel Rock, and Chad Syverson explained that general purpose, transformative technologies, - such as the steam engine, electricity, and semiconductors, - “are the defining technologies of their times and can radically change the economic environment. They have great potential from the outset, but realizing that potential requires larger intangible and often unmeasured investments and a fundamental rethinking of the organization of production itself.”
The life cycle of historically transformative technologies consists of two district phases, investment and harvesting. Since the technologies are general purpose in nature, they require massive complementary investments, including business process redesign, co-invention of new products and business models, and the re-skilling of the workforce. Moreover, the more transformative the technologies, the longer it takes for them to reach the harvesting phase when they are widely embraced by individuals, companies and industries across the economy.
Azhar argues that the gap between technological and institutional change has considerably widened in our 21st century digital, data-driven economy.
“Until the early 2010s, most companies assumed the cost of their inputs would remain pretty similar from year-to-year, perhaps with a nudge for inflation. The raw materials might fluctuate based on commodity markets; but their planning processes, institutionalised in management orthodoxy, could manage such volatility. But in the Exponential Age, one primary input for a company is its ability to process information. One of the main costs to process that data is computation. And the cost of computation didn’t rise each year, it declined rapidly. The underlying dynamics of how companies operate had shifted.”
For example, not that many years ago, the world’s largest companies were car, oil, utilities and other industrial economy companies. But, the past decade has seen the rise of global superstar companies which use the vast amounts of data gathered from their customers to offer them products and services customized to their individual preferences. The more data a company has, the more customers it will able to attract and the more data it’s then able to gather, helping them offer more customized products and services which makes their platforms even more valuable. This creates network effects and economies of scale, leaving smaller companies without access to all that data at a major economic disadvantage.
In the industrial economy of the previous two centuries, a company’s value was determined by its tangible assets, - e.g., land, plants, equipment, vehicles. But, over the past few decades we’ve seen the growing value of intangible assets, including patents, copyrights, trademarks, goodwill, brand value, human capital, R&D, software, and data. In 1975, the overall value of the S&P 500 was $715 billion, of which 17% was intangible. By 1995, the percentages had switched, with intangibles being 68% of $4.6 trillion. Intangible values continued to climb to 80% out of $11.6 trillion in 2005; and to 84% of $25 trillion in 2018.
“In the Exponential Age this divergence is ongoing – and it is everywhere,” writes Azhar. This growing divergence has led to a number of serious issues:
Market power, monopolies and anti-trust. “When an exponential age company is able to grow to an unprecedented scale and establish huge market power, it may fundamentally undermine the dynamism of a market. Yet industrial age rules of monopoly may not recognise this behaviour as damaging.”
Work and employment status. Gig-working platforms create a market for a variety of jobs at the cost of more secure, dependable employment. “When workers compete for work on task-sharing platforms, by bidding via mobile apps, what is their employment status? What rights do they have? Does this process empower them or dehumanize them? Nobody is quite sure: our approach to work was developed in the nineteenth and twentieth century.”
Customer information and privacy. “As companies develop new services using breakthrough technologies, ever more aspects of our lives will become mediated by private companies. What we once considered to be private to us will increasingly be bought and sold by an Exponential Age company. This creates a dissonance: the systems we have in place to safeguard our privacy are suddenly inadequate; we struggle to come up with a new, more apt set of regulations.”
Almost 80 years ago, Austrian economist Joseph Schumpeter wrote about creative destruction - “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Disruptive technologies and innovations have long been an opportunity for startups to take on established companies with new products that offer significantly better capabilities and/or lower costs.
In my own long career in the IT industry, it’s frankly sobering how many once powerful IT companies are no longer around or are shadows of their former selves, e,g, Digital Equipment, Wang, Sun Microsystems, BlackBerry. While the forces of disruption might have been more powerful in the fast-changing IT industry, no industry has been immune.
Azhar’s article mentions the case of Kodak, which during most of the 20th century had a dominant position in photographic film and inexpensive cameras. In 1975 Kodak sold 90% of the photo film in the US and 85% of its cameras. In 1975 Kodak developed the first digital camera but didn’t pursue the opportunity for fear that it would threaten it’s existing business. As the transition to digital accelerated over the next two decades, Kodak went on to develop a range of digital cameras, but the company was never able to adapt to the changing markets, and in 2012 it filed for bankruptcy.
“A company's failure to adapt is bad news for its shareholders,” notes Azhar. “The company goes bust, leaving customers with defunct products and staff with fond (or not so fond) memories. But this is not the end of the world.” The information technology and digital photography industries are both continuing to thrive.
“However, as the Exponential Age takes off, the gap will pose an ever more existential problem,” he adds. “At the turn of the 2020s, exponential technology has become systemically important. Every service we access, whether in the richest country or the poorest, is likely to be mediated by a smartphone. Every interaction with a company or our government will be handled by a machine learning algorithm. Our education and healthcare will be delivered through AI-enabled technologies. Our manufactured products, be they household conveniences or our houses, will be produced by 3D printers. Exponential technologies will increasingly be the medium through which we interact with each other, the state and the economy.”
“For the people and companies who understand this shift, the exponential gap creates a huge opportunity. Those who harness the power of exponentiality will do much better than those who don’t. This isn’t simply about personal wealth. Our rules and norms are shaped by the technologies of the time - those who design essential technologies get a chance to shape how we all live. And these people are in the minority. We are witnessing the emergence of a two-tier society – between those who have harnessed the power of new technology, and those who haven’t.”
What can be done about the widening exponential gap? Technological advances will clearly continue. So, we can only close the gap by “equipping our social institutions - from governments, to companies, to cultural norms - to adapt at pace,” wrote Azhar in conclusion. “It would allow us to harness the power of exponentiality, and the rules and norms that can shape it, for the needs of our society.”
“This is an urgent need. In the Exponential Age the institutions that govern our economies will cease to be fit for purpose. New technologies will clash with our existing expectations, rules and systems. We need radical thinking to prevent the exponential gap eroding the fabric of our society.”
Thanks, Irving, for a succinct, informative summary of the accelerating transits world corporations face today. I would be interested in extending the analysis outside the corporate lens. Social nets have already changed national politics in myriad ways. Do you think it is possible to map the likely transition path of technology in the context of the varied cultures of the current state? Consider, for instance the battlefield, where the test tubes see real world trials. Classic scenarios of action and reaction have been upended by the Ukraine situation on the field of battle. But, as well, stirring the information yogurt in the ancien Russian Republic (How quickly can crisis awareness shift political and economic tectonic shifts?) There is an interesting book here.
Posted by: David Matthew | March 25, 2022 at 10:59 PM